Presented to the

4th International Conference “An Enterprise Odyssey:

Tourism - Governance and Entrepreneurship” Dubrovnik, Croatia 11-14 June 2008

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ENTREPRENEURSHIP IN THE

RUSSIAN SERVICE SECTOR:

TRENDS AND DEVELOPMENTS

Anatoly ZHUPLEV Loyola Marymount University

Los Angeles, USA

Dmitry SHTYKHNO Plekhanov Russian Academy of

Economics

Moscow, Russia

Background

“Long-term success in economic development … depends to a significant degree on a growing network of small entrepreneurial enterprises” (Neace, 1999)

Financial dislocations and collapses of the 1990s and extremely poor legal environment in Russia did not allow for any meaningful growth of SMEs in service industry until deregulation started in 2001

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Recent GDP Trends

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By 2005 Russia’s GDP in real terms reached almost 90% of the pre-

reform level of 1990

The share of its GDP generated by the service sector is still low (2006)

High growth in the construction (13.2%), retail trade (12.5%) and

transport (2.5%) sectors

Roots and Prevalent Types of Russian SMEs

Entrepreneurial potential in Russia stems from vast natural resources and well-educated population

Prevalent types of Russian SMEs • 1st type: small-scale and individual manufacturing of goods,

retail trade, hotel and food services, construction, transportation, and health care - subject to local natural conditions, consumer preferences, and traditional local specialization in the nationwide context

• 2nd type: suppliers of parts and services for large enterprises – not numerous but have strong potential

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Prevalence Rates of Entrepreneurial Activities: Russia versus Other Countries

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Country Nascent

Entrepreneurial

Activity

New Business

Owners

Early-Stage

Entrepreneurial

Activities

Established

Business

Owners

Russia 3.5% 1.7% 4.9% 1.2%

China 6.7% 10.5% 16.2% 9.0%

Germany 2.9% 1.7% 4.2% 3.0%

Italy 2.2% 1.4% 3.5% 3.0%

Japan 1.6% 1.4% 2.9% 4.8%

USA 7.5% 3.3% 10.0% 5.4%

Almost 1 mln SMEs in Russia in 2006

• 7.2 per 1000 of population

to compare with EU – 45, Japan - 49.6, USA – 74.2

Distribution of SMEs in Russia by federal districts:

• Central and North-Western >50% (including 25% in Moscow)

• Southern 9.7%

• Ural 6.7%

• Far Eastern 4.8%

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Distribution of SMEs in Russia

Priority Subsectors

7 Distribution of SMEs in Russia, % of the total number of SMEs (2006)

Recent Initiatives Legislative Reforms and Developments in the SME Sector

The Foundation for Assistance to Small Innovative Enterprises (FASIE) in 1994

The law evolves to streamline the number and extent of inspection procedures, the licensing of economic activities, the taxation of SMEs and the registration of new businesses since 2001

Simplified tax regime for SMEs in 2002

‘One-stop shop’ approach to business registrations in 2002 8

World Bank’s Ratings of Doing Business in Russia

Ease of... Rank 2008 Rank 2007

Doing Business (overall) 106 112

1. Starting a Business 50 45

2. Dealing with Licenses 177 172

3. Employing Workers 101 102

4. Registering Property 45 44

5. Getting Credit 84 156

6. Protecting Investors 83 81

7. Paying Taxes 130 126

8. Trading Across Borders 155 155

9. Enforcing Contracts 19 19

10. Closing a Business 80 81

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Obstacles in SME Start-ups and Operation (1)

Taxation system

Lack of finance and credit facilities, state credit lines requirements

Impoverishment of the population severely limiting effective demand

Obsolete equipment for small-scale manufacturing and limited availability of new one

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Obstacles in SME Start-ups and Operation (2)

Lack of knowledge about economics management and business procedures

Lack of insurance services for small business

Bureaucracy and administrative barriers (red-tape)

Corruption and racket

Lack of incentives for long-term business

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Decision-Making Patterns in SMEs: Soviet Heritage

Most of entrepreneurs have never received any formal business education

In USSR service industry was neglected for political reasons

“Service business does not require special knowledge and skills”

First entrepreneurs: former managers of state-owned companies, former "cooperators“, “deal genius“, professionals, Soviet era entrepreneurs/ black market masters

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Decision-Making Patterns in SMEs: Current

Quick learners

Strong demand for business education

Not strong consumption of specialized information services

Growing number of female entrepreneurs

Still “being a servant” has derogatory connotation attached

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SMEs in the Service Sector in Moscow

Restaurant business is one of the fastest-growing (10,000 enterprises with total capacity of almost 700,000 seats)

Accommodation business: shifting from the development of four- and five-star hotels to building a network of medium-class hotels

Consumer services business: least developed due to lack of support and governance in earlier years

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Conclusion

Remaining problems: restraining taxation system, limited access to financing, relatively low consumer spending power among general population, lack of SME training, non availability of business services

The stage of "wild business" in the post-Soviet transformation appears to have passed, there is a need for transparent business rules

Macro-economic environment and government efforts in streamlining legal environment contribute to the continuing increase in entrepreneurial potential

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Thank you

Comments and questions are welcome

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ENTREPRENEURSHIP IN THE RUSSIAN

SERVICE SECTOR:

TRENDS AND DEVELOPMENTS